Based on the Wesleyan perspective that faith and practice go hand-in-hand, the Social Principles and The Book of Resolutions of The United Methodist Church address many of the complex issues facing society today. They provide the starting point for all Wespath Benefits and Investments (Wespath) investing. Among the many issues they address, Wespath has identified the following as deserving special attention:

Unless otherwise indicated, all paragraph citations are from The Book of Discipline 2008, and all Resolutions are from The Book of Resolutions 2008.

Sustainability Reporting

Wespath believes that environment, social and governance (ESG) factors can have a material impact upon corporate financial performance. In 2003, we began encouraging companies we invest in to publicly report on their ESG policies and practices. These reports are commonly called “Sustainability Reports” or “Corporate Social Responsibility” reports. A growing body of research supports Wespath’s position that sources of financial risk – and opportunity – may lie within the pages of a corporate sustainability report.

Sustainability most commonly refers to “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” This is the definition developed by the World Commission on Environment and Development (sometimes known as the Brundtland Commission) in 1987. When applied to companies, sustainability involves conducting business so as not to negatively affect long-term viability, shareholder value, the environment or stakeholders (including consumers, employees and local communities).

Both investors and consumers are recognizing the importance of sustainability. Many companies have responded by improving their disclosure of business policies, practices, goals, and progress related to environmental and social issues. The reporting process is often a catalyst to identify key sustainability challenges and opportunities, and companies frequently report such benefits as: lower costs, less waste, and increased productivity.

The United Methodist Church recognizes that “[c]orporations are responsible not only to their stockholders, but also to other stakeholders: their workers, suppliers, vendors, customers, the communities in which they do business, and for the earth, which supports them. We support the public’s right to know what impact corporations have in these various arenas, so that people can make informed choices about which corporations to support” (¶163).

In addition, “the policy goals of the General Conference of The United Methodist Church…shall be to persuade corporations to integrate responsible business practices on environmental, social and governance issues into their operations and to be transparent in documenting these endeavors in public reports” (Resolution 4071.3).

Based on Church teaching and the belief that sustainable companies offer greater shareholder value, Wespath has engaged a number of companies in dialogue regarding the development of sustainability reports.

The Environment

Conservation of Resources

United Methodist statements on the environment are many and stem from the basic conviction that “[a]ll creation is the Lord’s, and we are responsible for the ways in which we use and abuse it” (¶160).

As a result of the diminishing availability of natural resources, companies may experience increased costs, decreased output and tighter regulatory standards. Thus, environmental externalities can pose significant risk to investment portfolios.

Recognizing the responsibility to support a more ecologically equitable and sustainable world, Wespath engages companies on three important areas:

Climate change

Water management

Food safety

Climate Change

Not everyone agrees on how climate change takes place, but the scientific community overwhelmingly acknowledges the reality of global warming. Many companies contribute directly to global warming through greenhouse gas (GHG) emissions; however, all are susceptible to the effects. This is a concern of many corporate stakeholder groups – legislators, regulators, insurers, consumers, and investors.

Anticipating how climate change may affect a company’s ability to operate in the future has financial opportunities and risks for shareholders. For example, corporate leaders are learning that competitive advantage can be achieved through attention to GHG emissions. Participants in the Environmental Protection Agency’s Climate Leader program report saving tens – and sometimes hundreds – of millions of dollars through energy efficiency and emissions reduction programs. On the other hand, the lack of federal emissions standards resulted in more than 20% of states enacting their own carbon regulations. This requires corporations to achieve varying levels of compliance, which may be costly for heavy emitters.

Accordingly, Wespath calls upon companies to report on their response to issues relating to global warming and climate change.

The United Methodist Church calls for the “control of global warming” (Resolution 1001.8), the support of “strenuous efforts to conserve energy and increase energy efficiency” (Resolution 1001.1), the United States to “move beyond its dependence on high carbon fossil fuels that produce emissions leading to climate change” (Resolution 1002.1) and “measures calling for a reduction of carbon dioxide, methane, nitrogen oxides, and sulfur dioxide, which contribute to acid rain and global climate change” (Resolution 1023).

Water Management

The United Methodist Church believes, “Water cannot be monopolized or privatized. It is to be shared like air, light, and earth. It is God’s elemental provision for survival for all God’s children together on this planet” (Resolution 1029).

Given that only 8% of all water used annually is for domestic households, while 23% is for industry and 69% is for agriculture, the Church “shall encourage and commit to good water management by all entities, corporations, and communities” and “shall push companies that pollute to provide funds and services to clean waters that they pollute” (Resolution 1029).

Wespath encourages companies to conduct water assessments and to:

Implement water efficiency measures

Include water availability in the assessment of future operational sites

Examine the corporate supply chain for water risk

Publicly disclose the results of the company’s initiatives.

Food Safety and Product Labeling

A safe and sustainable food supply is critical to the human population. In the United States, agricultural production has shifted from a large network of independent family farms to a concentrated system of “factory farms.” This industrialized system allows food companies to utilize the economies of scale and is one of the factors that helps provide low-cost food. However, the model also externalizes the risk related to many environmental liabilities, which may be a material factor to the company’s long-term sustainability. Wespath calls upon food companies to review their business models to ensure they are accurately incorporating material environmental risks.

Genetically modified organisms (GMOs) are organisms whose genetic structures have been altered by the introduction of nonrelated genetic material. GMOs represent an ever-growing segment of all U.S. agricultural production. According to GMO Compass (www.gmo-compass.org), a website funded by the European Commission, the U.S. is the world’s largest producer of genetically modified crops. In 2009, 91% of all soybeans, 85% of all maize, and 88% of all cotton grown in the U.S. were genetically modified varieties.

Supporters of GMO crops claim they can help eradicate world hunger, make more efficient use of farm land, reduce pollution hazards and raise nutritional levels. Opponents, however, point out that food containing genetically modified crops has not been adequately tested for safety and may cause as-yet-unknown allergic reactions. In addition, they claim that the increasing prevalence of genetically modified crops could result in a handful of companies controlling the world’s seed supply.

Accordingly, Wespath supports the consumers right-to-know with regard to labeling of food products that contain GMO ingredients, and safety testing of GMO ingredients. The United Methodist Church “support[s] policies that protect the food supply and ensure the public’s right to know the content of the foods they are eating,” and “call[s] for clear labeling of all processed or altered foods, with premarket safety testing required.” The Church also “oppose[s] weakening the standards for organic foods” and “call[s] for policies that encourage and support a gradual transition to sustainable and organic agriculture” (¶160G).

Social

Labor Standards

Globalization has made us aware that people around the world work under vastly different circumstances. In some factories, particularly in developing countries, there are reports of forced overtime, low wages, unsafe working conditions and child labor. While these issues can be difficult to quantify, there is no doubt that their relationship to a corporation’s reputation and stakeholder support can affect the bottom line.

Methodism's first social creed, adopted in 1908, was largely concerned with labor issues. Echoing concerns still keenly felt today, the Church called for “a living wage in every industry,” “the abolition of child labor,” “the principle of conciliation and arbitration in industrial dissensions” and, ultimately, “equal rights and complete justice for all men in all stations of life” (¶59, Appendix, The Book of Discipline 1908).

The current United Methodist Church Social Principles assert that “every person has the right to a job at a living wage” (¶163C), “the right...to organize for collective bargaining” (¶163B) and the right “to refuse to work in situations that endanger health and/or life” (¶163C), and that “foreign workers [have] the same economic, educational, and social benefits enjoyed by other citizens” (¶163F).

Accordingly, Wespath believes that companies should maintain and enforce clear codes of conduct for their various suppliers and global facilities. These codes are meant to ensure that workers all over the world are treated humanely, compensated fairly and allowed to organize without fear of intimidation or reprisal.

By holding corporations accountable for the implementation of their codes of conduct, Wespath gives voice to the Church’s commitment to affirm humanity in all places.

Human Rights

Recognizing that “Christians are called to celebrate and protect the worth and dignity of every human being and struggle against oppression and exploitation” (Resolution 4081) and that “persons and groups must feel secure in their life and right to live within a society if order is to be achieved and maintained by law” (¶165D), The United Methodist Church affirms “the basic rights of all persons to equal access to housing, education, communication, employment, medical care, legal redress for grievances, and physical protection” (¶162).

As a supporter of human rights, Wespath is especially sensitive to those regions of the globe experiencing political and civil unrest. From apartheid in South Africa, the tomato pickers in Florida, the beverage distributors in Columbia, the cocoa fields of West Africa, the military junta’s treatment of citizens of Burma, the cotton fields of Uzbekistan and the genocide in Sudan, Wespath advocates for corporate accountability for human rights around the globe. Advocacy efforts include letter writing, dialogue with corporate management, filing shareholder resolutions and, in rare cases, divestment.

Diversity / Cultural Sensitivity

“We affirm all persons as equally valuable in the sight of God. We therefore work toward societies in which each person’s value is recognized, maintained, and strengthened” (¶162). The United Methodist Church strongly supports diversity and equal rights both in the Church and in society at large. Believing racism to be a sin, the Social Principles recognize such tools as affirmative action to address “the inequalities and discriminatory practices within our Church and society” (¶162A). Specifically, the Social Principles affirm the rights of racial and ethnic persons, women, men, religious minorities, children, the elderly, immigrants, persons with disabilities and homosexuals.

Wespath calls upon companies to embrace equal employment opportunity, use of minority-owned vendors and greater representation by women at all employment levels. Additionally, companies are asked to publicly disclose policies and programs designed to foster diversity and to report on diversity data.

In connection with equality of opportunity, The United Methodist Church recognizes that some communities have been victimized in ways that go beyond the economic. Native American communities, in particular, have seen their historic cultures devalued by the appropriation of native names and symbols and the violation of sacred sites. Resolution 3327 denounces “the continued use of Native American names as nicknames for sport teams as racist and dehumanizing,” while Resolution 4081.7 “urges Wespath invest funds in Native American financial institutions and community.” We responded through our Positive Social Purpose Investment Program, investing funds in Native American financial institutions.

Health

Despite advances in the treatment of HIV/AIDS, this worldwide pandemic continues to devastate communities across the globe. According to United Nations sources, in 2010, 33 million people were living with HIV- 15 million of those were in low and middle income countries (LMIC). Treatment rates in LMIC have climbed to nearly one-third of those in need, however, the global economic downturn may lead to decreased funding for programs designed to reach LMIC patients.

The impact of AIDS, tuberculosis and malaria on human capital in certain parts of the world may be significant – not only in employee turnover rates due to infection and death, but as disease claims the lives of teachers, nurses, and parents, there are fewer adults to raise and teach the children. As education levels decrease, the available pool of qualified workers is reduced.

The Church states that “countries facing a public health crisis such as HIV/AIDS must have access to generic medicines and to patented medicines” (¶162V) and affirms that “[a]ll individuals living with HIV and AIDS should be treated with dignity and respect” (¶162U).

Accordingly, Wespath has been an advocate—through dialogues and shareholder resolutions—for the availability of low-cost HIV/AIDS medications and for workplace policies that stress education and nondiscrimination based on HIV/AIDS status. We also have asked companies to give serious consideration to the effects the HIV/AIDS pandemic will have on business operations.

Corporate Governance

For many years, Wespath and other sustainable investors have engaged companies in dialogue on best practices in corporate governance. The topic gained widespread support, however, after accounting irregularities and lax oversight resulted in the failure of several well-known corporations in 2000 and 2001.

The United Methodist Church believes, “Corporations are responsible not only to their stockholders, but also to other stakeholders: their workers, suppliers, vendors, customers, the communities in which they do business, and for the earth, which supports them. We support the public’s right to know what impact corporations have in these various arenas” (¶163I).

Accordingly, Wespath is committed to good corporate governance policies and practices including:

Boards of directors should reflect the diversity of our society (more representation by women and ethnic persons)

Directors should stand for election each year

Directors should be elected only if they receive a majority of the vote

The majority of directors, as well as the board chairperson, should be independent of company management (as defined by the New York Stock Exchange)

Directors should have sufficient knowledge of the industry in which the company operates

The chief executive officer and the chairperson of the board should not be the same person

Shareholders should have an advisory vote on executive compensation

Corporate political contributions should be publicly disclosed

Lending Practices

Lending institutions are under constant pressure to increase the value of loan portfolios. As a result, some institutions loosened their underwriting standards and approved many loans to borrowers with questionable credit histories. Relaxing underwriting standards without proper controls can seriously undermine a company’s ability to operate and can even lead to failure. In 2007, when interest rates began to adjust on many mortgages and borrowers defaulted in large numbers, banks’ ability to absorb losses became compromised. This was a major contributor to the ensuing collapse of the housing market.

The United Methodist Church “support[s] existing laws such as the Home Mortgage Disclosure Act, which provides information to the public on where banks and savings and loans make their loans, and the enlarged Community Reinvestment Act, which mandates that banks and savings and loans have the responsibility to serve the credit needs of moderate and lower-income communities” (Resolution 3262.A).

Through the Positive Social Purpose Investment Program, Wespath invests in institutions that provide affordable housing, community development and expanded loan opportunities for poor communities around the world.

Predatory lending is a term describing a type of lending that takes advantage of people with poor credit history or limited financial knowledge. Usually characterized by unscrupulous or unethical practices, predatory lending can include the application of excessively high fees and interest rates, the use of balloon payments, flipping (successive refinancing of the original loan at increasingly higher rates), packing (linking the issuance of the loan to the purchase of some form of insurance) and steering (directing otherwise creditworthy borrowers into high-interest loans). Most commonly, predatory lending targets the elderly, the poor and minorities.

Lenders may be involved in predatory lending either directly or through loan securitization. The securitization of loans is a process whereby one financial institution buys the loans of another, repackages them and then sells them to investors. Securitization provides lenders with new capital, which allows them to make additional loans.

Financial institutions engaged in loan securitization may be implicated in predatory lending if they have not sufficiently evaluated the loans they are securitizing to ensure predatory loans are not present.

The United Methodist Church directs all general agencies to invest in banks that have “policies and practices that preclude predatory or harmful lending practices” (Resolution 4071). Accordingly, Wespath encourages lending institutions to develop policies and evaluative procedures to ensure that loans, either direct or securitized, are not predatory.